By Saikat Chatterjee
LONDON (Reuters) - The dollar was flat on Friday, leaving it on course for its biggest weekly rise this year as a rise in U.S. Treasury yields fueled by a tax reform plan triggered a shake-out in short bets against it.
While the broader market remained skeptical about U.S. President Donald Trump's ability to push his tax plan through Congress, some see the dollar as primed for more gains in the short term after breaking out of established ranges.
"What you have seen is a general closing out of some short dollar positions but for that to be sustained we need greater detail on Trump’s fiscal plans and see it going through," said James Binny, head of currency portfolio management for EMEA at State Street Global Advisors, which manages $2.61 trillion in assets.
The dollar index (DXY), a trade-weighted basket of the greenback against its rivals, was little changed at 93.05.
It has gained more than 1 percent this week, putting it on track for its best weekly performance since December, spurred by the rise in U.S. yields.
Benchmark two-year yields (US2YT=RR) rose more than 20 basis points in the last week to hit their highest since October 2008, before settling slightly below those levels at 1.46 percent.
Trump on Wednesday proposed lower tax rates for businesses and individuals as part of a comprehensive overhaul of the U.S. tax code.
U.S. economic data, including the personal consumption expenditures price index for August later in the day, is also in focus, while the technical picture for the dollar was turning positive.
The dollar index punched above its 50-day moving average this week, a level it has traded below since April 2017.
Meanwhile the euro nursed losses and is poised for its first monthly decline since February as the result of Germany's national election prompted some profit-taking on a double-digit rally this year.
The single currency <EUR=EBS> was trading 0.3 percent up, near the day's high of $1.1816 on some short-covering before quarter-end. It was little moved by data showing euro zone inflation was a shade below expectations for September.
The euro has fallen 1.16 percent so far this week, its first weekly decline in seven months. Strategists at Bank of America Merrill Lynch (NYSE:BAC) say there is potentially still a large short euro and euro zone position despite this week's rally.
"This suggests that unwinding these short euro positions may be more relevant for the long term and could lead to a stronger euro in the years ahead, keeping everything else constant," they wrote in a weekly note.
Inflation in the 19-country currency bloc was 1.5 percent, unchanged from August and a tick below market expectations of 1.6 percent. The ECB targets inflation of just below 2 percent.